How much time does your company spend on the reputation game? A new study sheds light on the negative performance consequences of status inconsistency.
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Just like the old saying goes, a good reputation can indeed prove more valuable than money. For companies, status determines what hierarchical position they occupy in their markets. For others, it is also an important signal of the perceived quality of their products.
Consumers, suppliers and potential partners have a tendency towards favouring transactions with high-status organisations.
Until recently, we have believed that one organisation holds one status position, but most diversified firms participate in multiple markets simultaneously. Thus, they may experience what we refer to as status inconsistency, where they occupy unequal status positions in different markets.
This can be problematic for organisations because it creates ambiguity about their market identity. What can we expect from this firm? How do we properly evaluate them?
Using business schools as the empirical setting, we analysed the performance consequences of status inconsistency for organisations with multiple units. Secondly, we looked at established firms to seek out the available strategic measures to prevent them.
Diminishes status effectiveness
We found that status inconsistency diminished the effectiveness of status, particularly for high-status organisations. This suggests that it is harmful for these organisations to have their business units with inconsistent status positions.
Put differently, the bigger you are, the more you stand to lose by having underperforming business units in your organisation. At the same time, our study also suggests that directing funds to underperforming units rather than the most successful ones will be more beneficial in the long run.
However, status inconsistency can actually be beneficial for low-status organisations, as long as they focus limited resources on a few, but not all, units.
Number one or two, or leave everything?
After establishing these negative performance consequences, we studied data from a large group of American firms. From that, we saw that companies benefitted from responding to status inconsistency by selectively divesting business units, in order to make it easier for external audiences to make sense of their vertical market identity.
Our study thus reinterprets the now famous advice by Jack Welch, business guru and former CEO of GE, claiming that a company should either be number one or number two in their industry or leave it entirely.
We emphasize that status consistency is a key factor that directs corporate strategies of high-status firms like GE.
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Reference:
Wang, Pengfei; Jensen, Michael: A Bridge Too Far: Divestiture as a Strategic Reaction to Status Inconsistency. Management science 2019; Volume 65. (2). 859-878.
Jensen, Michael; Wang, Pengfei: Not in the same boat: How status inconsistency affects research performance in business schools. Academy of Management Journal 2018; Volum 61. (3) s. 1021-1049 BI
Text: Eivind Lindkvist Johansen, Communications Advisor, BI